Does it make sense to buy diesel car to save on fuel cost?

If one had visited a car dealership a year ago and inquired about purchasing a diesel car, he would have been told a 4-5 month waiting period for getting delivery. The widening gap between petrol and diesel prices had brought about a marked shift in favour of diesel vehicles.

If one had visited a car dealership a year ago and inquired about purchasing a diesel car, he would have been told a 4-5 month waiting period for getting delivery. The widening gap between petrol and diesel prices had brought about a marked shift in favour of diesel vehicles.

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Buyers still continue to make a beeline for the diesel variant, as can be seen from the April numbers, with diesel cars accounting for around 50 percent of the sales.

But trying to save on fuel cost by paying more for diesel cars does not make sense any longer.

Let's examine the facts. Diesel cars have always been more expensive than petrol vehicles. The gap has however widened significantly over the last 18 months. In Sept, 2011 - a Maruti Swift diesel was priced Rs 94,000 higher than the petrol variant. Today - it costs Rs 1,41,000 more to own a diesel Swift. Companies (especially Maruti Suzuki) have leveraged on the diesel rush by raising prices of the diesel variant. Customers have been comfortable paying the extra amount as insurance against a continuous hike in petrol prices. This strategy worked for some time.

Not any. Diesel prices have been de-controlled to an extent in January bringing down the difference between petrol and diesel prices sharply. Today petrol prices are Rs 13/litre higher than diesel. One year ago - petrol was Rs 32/litre higher.

What does this mean for a prospective diesel car buyer? It means that the break-even period for buying a diesel vehicle has risen substantially over the last 18 months. In September 2011, a diesel car buyer would have had to drive his vehicle for 52,000 kms to compensate for the initial premium paid to own the vehicle. This break-even reached to 61,000 kms in May 2012. Today, it is over 108,000 kms.

Given the fact that an average car buyer uses his car for 60,000 - 70,000 kms, the economics of purchasing a diesel car is hardly debatable today. Yet, why are buyers opting for it? It is primarily on the belief that in a phase of rising crude prices - the government will again resort to keeping a check on diesel prices while allowing petrol prices to go higher. If the government needed a vote of confidence on their ability to keep diesel prices unregulated, it is yet to come from car buyers.

But reality will seep in gradually. Sentiment will come in sync with this reality. Sentiment towards diesel can only remain strong if petrol prices surge significantly. How much higher? Well, if diesel remains unchanged from now and petrol prices are hiked to Rs 100/litre, a diesel buyer will still need to drive for close to 50,000 kms to break-even.

What does this mean for car makers?

The three listed car makers are Maruti Suzuki, Mahindra and Tata Motors. Tata Motors has already become a marginal player in the industry and with the trend away from diesel vehicles, the situation is only likely to worsen. Their primary customers have primarily been fleet operators. But that segment is also being challenged with the Toyota Etios. Unless they are able to introduce some new models, its future seems as bleak as that of Blackberry.

M&M was the biggest gainer in terms of market share last year. Every major variable was in its favour. This year, the scenario has reversed. Competitive intensity has increased with the likes of the Renault Duster making an impact even as Govt duties on their products has risen. In such an environment, the diesel factor is unlikely to have a major impact.

The major impact will be felt on Maruti Suzuki. The company has leveraged on the strong demand for its diesel vehicles by raising prices without much elasticity in demand. But, the era of indiscriminate price hikes by Maruti Suzuki on its diesel models is over. Any price hike will have to be taken with utmost caution. Demand on the ground is already seeing some change. A check with a few dealers reveals that diesel vehicles are easily available now and comprise about 70% of overall sales of a model. Less than 3 months ago, it constituted 80-85% of overall sales for a particular model. If Honda Amaze catches the imagination of the country, it might hurt the company even further. How Maruti responds to that challenge on its two prime models (Swift and Dzire) remains to be seen.

1st Sept 2011

24th May 2012

17th May 2013

Swift

Swift

Swift

Petrol

Diesel

Petrol

Diesel

Petrol

Diesel

Price ('000)

503

597

532

666

542

683

Diesel vs Petrol car difference ('000)

94

134

141

Average fuel price (per litre)

70

46

78

46

70

56

Mileage (kms/litre)

18.6

22.9

18.6

22.9

18.6

22.9

Running cost (Rs/km)

3.8

2

4.2

2

3.8

2.4

Diesel vs petrol running-cost difference (Rs/km)

1.8

2.2

1.3

No. of km to break even for diesel car

52,222

61,332

108,136

Volumes may however not get impacted severely as it is likely that a Maruti Swift/Dzire diesel prospective buyer will basically shift to its petrol variant. Given this shift it is conceivable that discounts on its petrol cars may reduce over the medium term, but in the immediate future that looks unlikely given the prevailing lackluster demand among car buyers. This means that the elevated realizations that the company announced in the recent quarter on the back of higher diesel car sales may not be sustained going forward.

While tracking the yen is critical for investors of Maruti Suzuki, it might be wise to keep a close look at the diesel price as well.